Public finances are sustainable despite a spike in spending and net indebtedness

Emergency measures to support the UK economy are costly and according to the ONS have increased the UK’s net indebtedness¹ from £1.8 trillion (86% of GDP) in February to £2.1 trillion (104% of GDP) in September. How concerned should we be given that the UK Government announced earlier in the year that the decade of austerity was over and that they intend to borrow to invest?

The slightly evasive answer is that interest rates are ‘supportive’, so far. The ten-year gilt rate (a benchmark for commercial property pricing) is at a historical low of around 0.20% and may be driven lower by monetary policy should the Bank of England lower rates or increase quantitative easing further. This means that despite a substantial increase in government emergency borrowing to support the economy, interest payments on the national debt have fallen. Between September 2019 and September 2020, the 12-month rolling sum has fallen from £49.5 billion (6.1% of revenue) to £42.6 billion (6.0% of revenue).This is not a bad result considering that central government revenues have declined by almost 6% over the same period. In contrast, interest payments peaked at 9.3% of revenue in 2011 in the aftermath of the Global Financial Crisis, ushering in the decade of austerity. The maximum sustainable level is considered to be 12%. Beyond this level usually results in a visit from the International Monetary Fund (IMF).

Is the UK debt level sustainable? Yes. Interest rates are expected to remain very low for the foreseeable future and given that the UK monetary and fiscal policy is not constrained either directly or indirectly by external regulation, the UK has flexibility in its approach to debt management. Furthermore, the IMF released a statement in early October suggesting that countries that can borrow, should consider borrowing to invest to stimulate growth and a recovery.

For the moment, the UK has great flexibility in public finance that is constrained only by ideologically driven fiscal restraint. Nevertheless, tax rises look increasingly likely after the pandemic is at bay and the economy has stabilised in 2022.

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About the Author

Chief Economist, and Head of Research of Forecasting at Colliers International, Walter Boettcher has over 20 years UK and European property industry experience. Highly renowned for his publications on Brexit, Economic Outlook & Trends, and Property Cycles, Walter has redefined how research can be used to support agency and professional services business development.

For more information, please email walter.boettcher@colliers.com.